Lon Smith & Associates, Inc., and A-1 Systems, Inc. D/B/A Lon Smith Roofing and Construction v. Joe Key and Stacci Key ( 2022 )

In the
Court of Appeals
Second Appellate District of Texas
at Fort Worth
___________________________
No. 02-21-00227-CV
___________________________
LON SMITH & ASSOCIATES, INC., AND A-1 SYSTEMS, INC. D/B/A LON
SMITH ROOFING AND CONSTRUCTION, Appellants
V.
JOE KEY AND STACCI KEY, Appellees
On Appeal from the 236th District Court
Tarrant County, Texas
Trial Court No. 236-267881-13
Before Bassel, Wallach, and Walker, JJ.
Opinion by Justice Wallach
OPINION
This is an interlocutory appeal from an order denying Appellants’ Lon Smith &
Associates, Inc., and A-1 Systems, Inc. d/b/a Lon Smith Roofing and Construction
(“Smith”) Motion to Amend Class Definition or Motion to Compel Arbitration. We
will dismiss the appeal of their Motion to Amend Class Definition for lack of
jurisdiction. We will affirm the trial court’s order denying their Motion to Compel
Arbitration.
I. Background
A. Smith 1
This is part two of this court’s saga with this litigation. Part one (Smith 1), can
be read at Lon Smith & Assocs., Inc. v. Key, 527 S.W.3d 604 (Tex. App.—Fort Worth
2017, pet. denied). The facts giving rise to this dispute were summarized in Smith 1:
A May 2011 hailstorm damaged the roof of the Keys’ residence.
The Keys notified their homeowners’ insurance carrier of the damage,
and Joe signed a contract with A-1 for the installation of a new roof with
a total price of $33,769.50. Stacci did not sign the contract; the Keys
allege that Joe signed it on her behalf. The “Acceptance and Agreement”
provision of the contract provided that
[t]his Agreement is for FULL SCOPE OF INSURANCE
ESTIMATE AND UPGRADES and is subject to insurance
company approval. By signing this agreement homeowner
authorizes Lon Smith Roofing and Construction (“LSRC”) to
pursue homeowners[’] best interest for all repairs, at a price
agreeable to the insurance company and LSRC. The final price
agreed to between the insurance company and LSRC shall be the
final contract price.
2
A-1 installed the new roof. The Keys paid their homeowners’
insurance proceeds of $18,926.69 to A-1, leaving a balance on the
$33,769.50 amount. To collect the amount A-1 claimed that the Keys
owed, A-1 filed suit against Joe in a justice court and obtained a default
judgment. Joe subsequently challenged the default judgment and
obtained a June 23, 2015 judgment setting it aside as void. A-1 appealed
the June 23, 2015 judgment to the county court at law. See Tex. R. Civ.
P. 506.1.
Meanwhile, in September 2013, the Keys sued LSRC, asserting
that the Acceptance and Agreement provision in the contract with A-1,
which did business collectively with Associates, violated Texas Insurance
Code section 4102.051’s prohibition against a corporation acting or
holding itself out as a public insurance adjuster in the absence of a
license. See Tex. Ins. Code Ann. § 4102.051(a) (West Supp. 2016).
Accordingly, the Keys claimed the agreement was illegal, void, and
unenforceable. See id. § 4102.207(a), (b) (West 2009) (setting forth
remedies for violation of chapter 4102).
Based on the alleged illegality of LSRC’s agreement under section
4102.051, the Keys pleaded a claim for declaratory relief—to declare the
agreement with LSRC illegal, void, and unenforceable and to declare,
consequently, that they and other class members are “entitled to a
judgment restoring all monies paid to [LSRC] under the illegal contract”
pursuant to the statutory remedy provided by section 4102.207(b). See
Tex. Ins. Code Ann. §§ 4102.051, .207(b); Tex. Civ. Prac. & Rem. Code
Ann. §§ 37.002, .011 (West 2015). The Keys also pleaded causes of
action for damages based on DTPA violations, fraud, violations of the
Texas Debt Collection Practices Act, and fraudulent use of court
records.
In due course, the Keys obtained class certification of their
declaratory-judgment claim and their DTPA claims under sections
17.50(a)(3) (Unconscionability) and 17.50(a)(4) (Violation of Chapter
541 of the Texas Insurance Code). 1
1
In Smith 1, we referred to Lon Smith & Associates, Inc. as “Associates,” to A-
1 Systems, Inc., d/b/a Lon Smith Roofing and Construction as “A-1” and Associates
and A-1 collectively as “LSRC.” For purposes of this appeal, we refer to them
collectively as “Smith” unless otherwise noted.
3
Id. at 610–11.
The trial court’s certification order that led to Smith 1 certified the Keys to
represent a class defined as follows:
All Texas residents who from June 11, 2003 through the present signed
agreements with [LSRC] that included the following provision, or
language substantially similar to the following provision: “This
Agreement is for FULL SCOPE OF INSURANCE ESTIMATE AND
UPGRADES and is subject to insurance company approval. By signing
this agreement homeowner authorizes Lon Smith Roofing and
Construction (“LSRC”) to pursue homeowners[’] best interest for all
repairs at a price agreeable to the insurance company and LSRC. The
final price agreed to between the insurance company and LSRC shall be
the final contract price.”
Id. at 614–15.
The order certified three claims for class treatment: (a) the Keys’ declaratory
judgment claim, (b) the Keys’ DTPA claim based on Section 17.50(a)(3)
(Unconscionability), and (c) the Keys’ DTPA claim based on Section 17.50(a)(4)
(Violation of Chapter 541 of the Texas Insurance Code). The class-certification order
set forth the trial court’s findings of fact and conclusions of law that the Keys had met
their burden of establishing all four requirements of Civil Procedure Rule 42(a) and
subdivisions (1)(A), (2), and (3) of Rule 42(b). See Tex. R. Civ. P. 42(a), (b)(1)(A), (2),
(3). The order certified the class alternatively under each of these subsections of Rule
42(b); provided for notice and opt-out provisions for each of the classes certified
alternatively under Rule 42(b)(3), 42(b)(2), and 42(b)(1)(A); appointed class counsel;
and set forth a trial plan. Smith 1, 527 S.W.3d at 615.
4
LSRC and A-1 appealed the class certification on multiple grounds in Smith 1.
We reversed that portion of the trial court’s class certification order certifying a class
under Section 17.50(a)(3) (unconscionability) under the DTPA and affirmed the
remainder of the class certification. Id. at 640. The Supreme Court denied petition for
review, and the case went back to the trial court for further proceedings, which now
brings us this appeal, Smith 2.
B. Smith 2
On January 30, 2020, the Keys filed their Motion to Shift Class Notice Costs to
Smith, arguing this court had already determined the merits of this case in favor of the
Keys and, therefore, Smith should be required to bear the costs associated with class
notice. Smith opposed the motion as the trial court had already entered a trial plan
which provided for the Keys or class counsel to bear the cost of notice, noting that
appointed class counsel had agreed to devote the resources to effect the notice.
On June 24, 2020, the trial court signed an Order Directing Defendants [Smith]
to Pay Costs of Class Notice, ordering them “to pay all invoices reflecting costs and
expenses incurred to provide of [sic] class notice.” Smith filed their Motion to Amend
Class Definition or Motion to Compel Arbitration, requesting the trial court to
(1) amend the class definition, pursuant to Rule 42(c) of the Texas Rules of Civil
Procedure, to exclude from the class those customers whose agreements with Smith
included arbitration provisions, or (2) compel arbitration under the Federal
Arbitration Act. Smith alleged that they had provided summary lists to opposing
5
counsel pursuant to Rule 1006 of the Texas Rules of Evidence of the
22,258 customers with arbitration provisions in their agreements from the
36,899 customer class files produced by Smith to the Keys. The arbitration language
in those customers’ agreements allegedly provided:
All parties agree to settle any disputes regarding damages, quality of
materials or workmanship through binding arbitration with the local
Better Business Bureau before either party may officially file suit with
any court. ARBITRATION SHALL BE BINDING.
On July 15, 2021, the trial court signed its Order Denying Smith’s Motion to
Amend Class Definition or Motion to Compel Arbitration, which also sustained the
Keys’ objections to the admissibility of the evidence filed in support of the Motions.
II. Jurisdictional Challenge
Whether we have jurisdiction to hear an interlocutory appeal is a question of
law. Texas A & M Univ. Sys. v. Koseoglu, 233 S.W.3d 835, 840 (Tex. 2007). The Keys
contend that this court lacks jurisdiction of this appeal in two points. First, they
contend that this court lacks jurisdiction over that portion of the trial court’s order
declining to amend the class definition. Second, the Keys contend that the remainder
of the appeal is a disguised motion to decertify the class, which this Court also lacks
jurisdiction to review. It is uncontroverted that this is an interlocutory appeal. Smith’s
Appellant’s Brief contains no statement of jurisdiction regarding the order denying the
motion to amend the class definition, only the denial of the motion to compel
arbitration. The Keys raised the issue of jurisdiction in their Appellees’ Brief. Smith’s
6
Reply Brief does not attempt to justify interlocutory jurisdiction of this court over the
trial court’s denial of the Motion to Amend Class Certification, only over that portion
of the trial court’s denial of the Motion to Compel Arbitration.
We hold that we lack jurisdiction over the trial court’s order denying the
Motion to Amend Class Certification. This Court has jurisdiction over an
interlocutory appeal only if a statute explicitly so provides. Stary v. DeBord, 967 S.W.2d
352, 352–53 (Tex. 1998). “Appellate jurisdiction is never presumed,” and “[u]nless the
record affirmatively shows the propriety of appellate jurisdiction,” courts of appeals
“must dismiss” appeals of interlocutory orders. In re Est. of Brown, 346 S.W.3d 780,
781 (Tex. App.—Dallas 2011, no pet.). No Texas statute authorizes jurisdiction over
an interlocutory appeal of an order denying a motion to amend or modify a class
definition. See Tex. Civ. Prac. & Rem. Code Ann. §§ 51.014, 51.016. Correspondingly,
“[g]enerally, modifications of certification orders, such as those modifying the size of
a class or a class definition, are not appealable.” Phillips Petroleum Co. v. Yarbrough,
405 S.W.3d 70, 76 (Tex. 2013).2 We, therefore, lack jurisdiction over those portions of
the order declining to amend or modify the class definition, including modifying or
amending it for arbitration related issues. DeBord, 967 S.W.2d at 354; see also City of
2
An exception to this rule may apply when an order “alters the fundamental
nature of the class” such that the propriety of class certification is called into question
and the order may be properly characterized as one “certif[ying] or refus[ing] to certify
a class.” See id. 405 S.W.3d at 76–79; Tex. Civ. Prac. & Rem. Code Ann.
§ 51.014(a)(3). This exception is not applicable to this case.
7
Arlington v. Tex. Elec. Serv. Co., 540 S.W.2d 580, 582 (Tex. App.—Fort Worth 1976,
writ ref’d n.r.e.) (“A[] [permissible] appeal from an interlocutory order . . . may not be
used as a vehicle for carrying other non-appealable interlocutory orders and
judgments to the appellate court.”).3 Thus, the Keys’ challenge to this court’s
jurisdiction regarding the trial court’s denial of the Motion to Amend Class
Certification is sustained.
Is the remainder of this appeal a disguised motion to decertify the class over
which this Court would arguably lack jurisdiction to review by interlocutory appeal?
We hold that it is not. Smith sought relief from the trial court to compel arbitration
with the Keys and with each member of the certified class with which it had an
arbitration agreement. The court denied that motion in a signed, written order. Under
both the Federal Arbitration Act and the Texas Arbitration Act, denial of a motion to
compel arbitration is subject to interlocutory appeal. Bonsmara Nat’l Beef Co., LLC v.
Hart of Tex. Cattle Feeders, LLC, 603 S.W.3d 385, 390 n.4 (2020); Brand FX, LLC v.
Rhine, 458 S.W.3d 195, 201 (Tex. App.—Fort Worth 2015, no pet.). The trial court’s
3
The trial court’s order also denied Smith’s Motion to Modify Class Definition.
That motion sought to remove from the class all class members whose claims might
be barred by limitations. Smith’s notice of appeal arguably includes an appeal from the
order denying this Motion to Modify Class Definition. Smith, however, does not
include any appellate argument regarding this Motion to Modify. It is, therefore,
waived. Kerr v. Bank of New York Mellon Trust Co., N.A., Trustee, No. 02-20-00179-CV,
2021 WL 1421440, at *4 (Tex. App.—Fort Worth April 15, 2021, pet. denied) (mem.
op.). However, even if we were to consider it raised, a denial of a motion to modify a
class definition is not subject to interlocutory appeal under any statute or rule. See
Phillips Petroleum Co., 405 S.W.3d at 76.
8
order denying arbitration is properly subject to interlocutory appeal. Accordingly, we
overrule this jurisdictional challenge to the trial court’s order denying the motion to
compel arbitration.
III. Analysis
A. Standards of Review
We review a trial court’s order denying a motion to compel arbitration for
abuse of discretion. Henry v. Cash Biz, LP, 551 S.W.3d 111, 115 (Tex. 2018). We defer
to the trial court’s factual determinations if they are supported by evidence but review
its legal determinations de novo. Id. A trial court abuses its discretion if it acts in an
arbitrary or unreasonable manner or acts without reference to any guiding rules or
principles. In re Copart, 619 S.W.3d 710, 713 (Tex. 2021) (orig. proceeding); Downer v.
Aquamarine Operators, Inc., 701 S.W.2d 238, 241–42 (Tex. 1985). A trial court has no
“discretion” in determining what the law is or in applying the law to the facts. In re
Allstate Ind. Co., 622 S.W.3d 870, 875–76 (Tex. 2021) (orig. proceeding); Walker v.
Packer, 827 S.W.2d 833, 840 (Tex. 1992) (orig. proceeding). When, as here, the trial
court does not file findings of fact and conclusions of law, we will uphold the refusal
to compel arbitration if any viable legal theory—that was raised by the parties—
supports that decision. Mid-America Apartments, L.P. v. Trojan, No. 02-21-00204-CV,
2021 WL 5028794, at *2 (Tex. App.—Fort Worth Oct. 28, 2021, no pet.) (mem. op.);
APC Home Health Servs., Inc. v. Martinez, 600 S.W.3d 381, 389 (Tex. App.—El Paso
2019, no pet.).
9
B. Analysis of Issue Presented
Extracting the “issue presented” from the arguments in their “Issue Presented”
section, Smith’s sole complaint is that the trial court abused its discretion by denying
their Motion to Amend Class Definition or Motion to Compel Arbitration. Having
determined that we do not have jurisdiction over the Motion to Amend Class
Definition, we will limit our consideration to the denial of arbitration.4
1. Arbitration with the Keys
Although the Keys’ contract with Smith was not authenticated by testimonial
evidence, it was not necessary to do so. It was attached as Exhibit B to the Keys’
Third Amended Petition and Motion for Class Certification, and the Keys
acknowledged Joe Key’s signature to it. Its authentication was, therefore, judicially
admitted. Gracepoint Holding Co., LLC v. FJR Sand, Inc., No. 01-19-00574-CV,
2020 WL 61594, at *4 (Tex. App.—Houston [1st Dist.] 2020, no pet.) (mem. op.). By
signing an arbitration agreement, a party manifests its intent to be bound by it. In re
McKinney, 167 S.W.3d 833, 835 (Tex. 2005) (orig. proceeding); Truly Nolen of Am., Inc.
v. Martinez, 597 S.W.3d 15, 21 (Tex. App.—El Paso 2020, pet. denied). By signing a
4
Smith raises several arguments, with subparts, in its Brief, some of which are
anticipatory of the Keys’ arguments, e.g., arbitration under the Federal Arbitration Act
under a valid and enforceable arbitration agreement, no waiver by Smith of right to
arbitrate with the Keys’ or class members, and law of the case doctrine. In reaching
our decision, we have addressed many of those arguments as pertinent to our
decision. Otherwise, we need not address them based on the disposition we reach.
Similarly, the Keys raised a number of arguments which, based on our disposition of
the case, we need not address.
10
contract, a party is presumed to have read and understood its contents. See In re
Prudential Ins. Co. of Am., 148 S.W.3d 124, 134 (Tex. 2004) (orig. proceeding); UBS Fin.
Servs. Inc. v. Branton, 241 S.W.3d 179, 189 (Tex. App.—Fort Worth 2007, no pet.)
(UBS met its burden of establishing a valid arbitration agreement existed when it
proved that Branton signed two documents incorporating the arbitration agreement
from a master agreement).
The Keys contend that the arbitration agreement is not enforceable because the
contract was illegal, void, and unenforceable as contrary to public policy. Regarding
the defenses of illegality and voidness, the Keys contend that we held in Smith 1 that
the Keys’ contract is illegal and void, thereby rendering the arbitration agreement
unenforceable. Smith disagrees, arguing that we only held that the Keys and class
members had a viable claim. It is not necessary for us to resolve that disagreement.
Voidness and illegality of a contract as a whole is not a defense to a motion to compel
arbitration. That is a matter to be resolved by the arbitrator, not by the court denying
a request to arbitrate. In re Labatt Food Serv., L.P., 279 S.W.3d 640, 647–49 (Tex. 2009)
(orig. proceeding) (whether a contractual agreement containing an arbitration clause
violated the Labor Code was a challenge to the entire agreement for invalidity, which
was for arbitrator to decide); Friedman & Feiger, LLP v. Massey, Nos. 02-18-00401-CV,
02-18-00402-CV, 2019 WL 3269325, at *4 (Tex. App.—Fort Worth July 18, 2019, pet.
denied) (mem. op., on reh’g) (contention that contingency fee agreement containing
arbitration provision was void because it violated provision of the Estates Code was
11
challenge to the contract as a whole, which was for arbitrator to decide). The same is
true for the other asserted defenses. Perry Homes v. Cull, 258 S.W.3d 580, 589 (Tex.
2008) (“[A]rbitrators generally must decide defenses that apply to the whole contract,
while courts decide defenses relating solely to the arbitration clause.”); In re FirstMerit
Bank, N.A., 52 S.W.3d 749, 756 (Tex. 2001) (orig. proceeding) (defense of
unconscionability which goes to the contract as a whole, not specifically to the
arbitration clause, is for the arbitrator to decide). Thus, if Smith is entitled to
arbitration with the Keys, it will be up to the arbitrator to decide the merits of these
contractual defenses. If not, it will be up to the trial court to resolve them through a
decision on the merits of the case.
Having determined that Smith established the existence of an arbitration
agreement, we now address whether the Keys’ claims fall within the scope of the
arbitration clause. This is a question of law that we review de novo. Henry, 551 S.W.3d
at 115. The Texas Supreme Court has summarized the test for determining this issue,
Both Texas policy and federal policy favor arbitration. In re FirstMerit
Bank, 52 S.W.3d at 753. Thus, courts “resolve any doubts about an
arbitration agreement’s scope in favor of arbitration.” Id. Further, in
deciding questions like those before us, courts focus on the factual
allegations and not on the legal causes of action asserted. Id. at 754. The
presumption in favor of arbitration “is so compelling that a court should
not deny arbitration ‘unless it can be said with positive assurance that an
arbitration clause is not susceptible of an interpretation which would
cover the dispute at issue.’” Prudential Sec. Inc. v. Marshall, 909 S.W.2d
896, 899 (Tex. 1995) (quoting Neal v. Hardee’s Food Sys., Inc., 918 F.2d 34,
37 (5th Cir. 1990)). Further, the scope of an arbitration clause that
includes all “disputes,” and not just claims, is very broad and
encompasses more than claims “based solely on rights originating
12
exclusively from the contract.” See Pinto Tech. Ventures, L.P. v. Sheldon,
526 S.W.3d 428, 439 (Tex. 2017) (examining a forum-selection clause
and noting the analogies between such clauses and arbitration
agreements).
Id. at 115–16.
The arbitration paragraph of the Keys’ contract provides:
13. All Parties agree to settle any disputes regarding damages, quality of
materials or workmanship through binding arbitration with the local
Better Business Bureau before either party may officially file suit with
any court. ARBITRATION SHALL BE BINDING.
This type of broad language regarding settling “any disputes” regarding
“damages” clearly encompasses the Keys’ allegations brought in this case. See id.;
Athas Health, LLC v. Trevithick, No. 05-16-00219-CV, 2017 WL 655926, at *4 (Tex.
App.—Dallas Feb. 17, 2017, no pet.) (mem. op.) (“When the contract contains a
broadly written arbitration clause, so long as the allegations touch matters, have a
significant relationship with, or are inextricably enmeshed or factually intertwined with
the contract, the claim will be arbitrable.”).
Having determined that the Keys’ allegations are within the scope of the
arbitration agreement, we now address the final issue, whether Smith expressly or
impliedly waived their right to compel arbitration with the Keys. As noted by our
Supreme Court,
In essence, the question of whether a party has waived its right to
arbitration by its conduct in litigation is just another way of asking the
first question of arbitrability: whether there is a presently enforceable
arbitration agreement. If a party’s conduct in litigation equates to a
13
waiver of its rights under the arbitration agreement, there is no presently
enforceable agreement to arbitrate.
G. T. Leach Builders, LLC v. Sapphire V.P., L.P., 458 S.W.3d 502, 520 (Tex. 2015).
Waiver of arbitration by conduct is a question to be decided by the court, not
the arbitrator. Perry Homes, 258 S.W.3d at 587. We review this question of waiver de
novo. Henry, 551 S.W.3d at 115. Waiver, an intentional relinquishment of a known
right, can occur either expressly through a clear repudiation of the right or impliedly
through conduct inconsistent with a claim to the right to arbitration. Perry Homes,
258 S.W.3d at 590–91, 594; Moayedi v. Interstate 35/Chisam Rd., L.P., 438 S.W.3d 1,
6 (Tex. 2014).
A party makes an express waiver when it “affirmatively indicates that it wishes
to resolve the case in the judicial forum, rather than through arbitration.” Okorafor v.
Uncle Sam & Assocs., 295 S.W.3d 27, 39 (Tex. App.—Houston [1st Dist.] 2009, pet.
denied); see also Garcia v. Huerta, 340 S.W.3d 864, 869 (Tex. App.—San Antonio 2011,
pet. denied) (court found express waiver where party affirmatively stated in settlement
agreement that it was waiving its right to enforce an arbitration agreement).
Here, the Keys point to two statements made by Smith as constituting express
waiver of the right to arbitrate the Keys’ individual claims. First, in the Smith’s
Response to the Keys’ Motion for Class Certification, Smith was explaining to the
court why they considered the Keys’ claims to be atypical of the claims of the
purported class. Smith stated,
14
The parties have not enforced the arbitration clause in the Contract, and
both sides have sought affirmative relief from this Court. Thus, [the
Keys’] claims, which are no longer subject to compelled
arbitration, are atypical of the claims of class members who have
entered into binding arbitration agreements. [Emphasis added.]
Further, at the hearing on the Keys’ Motion for Class Certification, Smith’s counsel
stated:
The reason that we didn’t enforce the arbitration clause against
Mr. Key is irrelevant. We didn’t. We’re here now, but that doesn’t
mean we can’t as a result -- as against these other purported class
members. Okay. We can. [emphasis added.]
These statements to the trial court, in context, clearly represented that Smith
had affirmatively decided to resolve this case in the judicial forum rather than through
arbitration. Smith (A-1) initiated the legal process with Joe Key in 2012 when it sued
him in justice court to collect what it claimed to be the amount owed to it for services
performed under the contract in question. Smith (A-1) obtained a default judgment
against Joe Key, who then filed a bill of review that resulted in the justice court
declaring the default judgment void and the contract in question illegal, void, and
unenforceable. Smith (A-1) appealed the justice court judgment to the County Court
at Law, which case has been stayed. Thus, Smith (A-1) is still seeking judicial relief
against Key.
After the Keys filed this action on September 4, 2013, Smith did not seek to
enforce their arbitration agreement with the Keys. Almost two years later, and still no
motion to compel arbitration having been filed by Smith, the hearing on the Keys’
15
Motion for Class Certification occurred on May 26, 2015. Based on the statements
above, it is readily apparent that Smith had affirmatively decided not to pursue
arbitration with the Keys on the Keys’ individual claims, which decision was
announced to the court. 5
We hold that Smith expressly waived their right to arbitrate with the Keys on
the Keys’ individual claims. Such being the case, the trial court did not abuse its
discretion in denying Smith’s Motion to Compel Arbitration as to the Keys’ individual
claims.
To the extent that Smith did not expressly waive their right to arbitrate the
Keys’ claims, we hold that Smith’s litigation conduct constituted an implied waiver of
their right to arbitrate the Keys’ individual claims. To establish an implied waiver
through substantial invocation of the judicial process, the Keys had the burden to
prove that (1) Smith substantially invoked the judicial process in a manner
inconsistent with their claimed right to compel arbitration, and (2) the Keys suffered
actual prejudice because of the inconsistent conduct. Henry, 551 S.W.3d at 116; G.T.
Leach Builders, 458 S.W.3d at 511–12; Perry Homes, 258 S.W.3d at 589–90. Implied
waiver of arbitration by litigation conduct must be decided on a case-by-case basis,
and courts should look to the totality of the circumstances in deciding this issue. Perry
Homes, 258 S.W.3d at 591. The burden of proof is on the party asserting waiver, and
5
Notably, in this appeal, Smith did not attempt to explain in its briefing why
these statements do not amount to a clear expression of an express waiver.
16
the “hurdle” imposed by this burden is a “high one.” G.T. Leach Builders, 458 S.W.3d
at 511–12.
Courts have applied various factors in deciding this issue:
• whether the party who pursued arbitration was the plaintiff or the
defendant;
• how long the party who pursued arbitration delayed before seeking
arbitration;
• when the party who pursued arbitration learned of the arbitration
clause’s existence;
• how much the pretrial activity related to the merits rather than
arbitrability or jurisdiction;
• how much time and expense has been incurred in litigation;
• whether the party who pursued arbitration sought or opposed
arbitration earlier in the case;
• whether the party who pursued arbitration filed affirmative claims or
dispositive motions;
• how much discovery has been conducted and who initiated the
discovery;
• whether the discovery sought would be useful in arbitration;
• what discovery would be unavailable in arbitration;
• whether activity in court would be duplicated in arbitration;
• when the case was to be tried; and
• whether the party who pursued arbitration sought judgment on the
merits. 6
6
Based on the record before us, as well as the briefs of the parties, while some
discovery did occur in the case outside of the class certification realm, the vast
17
Hogg v. Lynch, Chappell & Alsup, P.C., 480 S.W.3d 767, 782–83 (Tex. App.—El Paso
2015, no pet.); see also G.T. Leach Builders, 458 S.W.3d at 512 (courts consider a “wide
variety” of factors in determining whether a party has substantially invoked the
judicial process). As the Supreme Court pointed out in Perry Homes, all of these factors
are rarely presented in a single case, and waiver has been established based on only a
few or even a single one. Perry Homes, 258 S.W.3d at 591.
We believe that Smith’s litigation conduct relative to the Keys’ individual claims
clearly demonstrates an implied waiver of arbitration rights. Obviously, Smith “knew”
about the arbitration provision in the contract since the contract was on their form
contract. Despite their own contract providing the right to arbitrate claims for
damages, Smith (A-1) chose to invoke the judicial process first by suing Joe Key in the
justice court for breach of contract damages for non-payment. Smith (A-1) did not
invoke the arbitration clause in the justice court. Rather, it pursued a default judgment
and an appeal of the justice court’s judgment setting aside the default judgment and
declaring the contract void and unenforceable. Invoking the judicial process in the
first case, which involved the same transaction and contract, as well as the same
defense to the contract—illegality, and pursuing it to judgment until it was set aside,
majority of the discovery conducted was related to class certification. The other
discovery factors identified in this list have little bearing on the issue of implied waiver
in this case.
18
and then appealing, weighs in favor of waiver of arbitration. Haddock v. Quinn,
287 S.W.3d 158, 178–79 (Tex. App.—Fort Worth 2009, pet. denied).
When the Keys filed this case in district court in 2013, Smith did not move to
compel arbitration, waiting instead for five years until December 12, 2018 to do so. In
the interim, Smith sought dispositive relief from the trial court by filing their Motion
for Partial Summary Judgment on October 28, 2013 (seeking summary judgment that
the Keys take nothing on their declaratory judgment action), their Second Motion for
Partial Summary Judgment on October 27, 2014 (seeking summary judgment on the
Keys’ claims for violation of the DTPA, for declaratory relief, and for fraud), and
their No-Evidence Motion for Summary Judgment on November 14, 2014 (seeking
summary judgment on the Keys’ claims for DTPA violations, fraud, and violations of
the Texas Debt Collection Practices Act). Smith specifically urged the trial court to
resolve these merits-based issues before deciding the certification of the class. 7
Filing these summary judgment motions addressed to the merits of the Keys’
claims, and urging the court to determine the merits weighs in favor of implied waiver
of arbitration. See BBX Operating, LLC v. Am. Fluorite, Inc., No. 09-17-00245-CV,
2018 WL 651276, at *6, *8 (Tex. App.—Beaumont Feb. 1, 2018, no pet.) (mem. op.)
(“A party’s request for affirmative relief is an important factor in determining whether
On December 9, 2014, the trial court stayed hearings on the motions for
7
summary judgment until after the class certification ruling was made.
19
a party has substantially invoked the judicial process.”); see also Hogg, 480 S.W.3d at
786.
In 2015, the focus of the case shifted to the class certification issue. On May
26, 2015, this issue was heard, and Smith’s counsel made the above-referenced
statements about having decided not to arbitrate and about the apparent finality of
that decision, i.e., “Thus, [the Keys’] claims, which are no longer subject to
compelled arbitration, . . . .” [Emphasis added.] On October 15, 2015, the Court
signed its Order Certifying Class Action with Trial Plan, which led to our opinion in
Smith 1.8 Smith and A-1 appealed our decision in Smith 1 to the Texas Supreme Court,
which denied both the petition for review and the motion for rehearing, the latter
being denied on November 16, 2018.
With the class-certification appeal concluded, the trial plan was ripe for
implementation. The plan provided for the Keys or class counsel to bear the expense
of notifying the class, consisting of 36,889 members, a substantial number and
expense to say the least. On December 21, 2018, less than forty days after the motion
for rehearing on the class certification was denied by the Texas Supreme Court, Smith
filed their Motion to Amend Class Definition or Motion to Compel Arbitration. The
essence of these motions was that 22,258 of the class members had arbitration clauses
The trial plan did not address the issue of arbitration. As noted in our opinion
8
in Smith 1, Smith and A-1 had failed to prove the existence of arbitration agreements
with the class members. 527 S.W.3d at 627.
20
in their contracts with Smith and that the trial court should either remove them from
the class definition to respect the contractual right to arbitration or order them to
arbitration pursuant to the arbitration agreements. In this motion, Smith also pivoted
regarding their position on arbitration of the Keys’ individual claims, which were
suddenly not “no longer subject to compelled arbitration.” The Keys opposed this
combined motion. Smith also filed a Motion to Modify Class Definition on May 26,
2021. However, no hearing on these motions occurred until July 15, 2021.
On January 30, 2020, the Keys filed their Motion to Shift Class Notice Costs to
Smith. This motion proposed to shift the costs of giving the class notice from the
Keys to Smith, which would add a substantial cost to Smith. 9 Both sides filed
pleadings opposing the other side’s motions. On June 5, 2020, the court heard the
Keys’ Motion to Shift Class Notice Costs to Smith, which the court granted by order
signed on June 24, 2020, thereby modifying the trial plan. After suffering this costly
defeat, Smith set for hearing their Motion to Amend Class Definition or Motion to
Compel Arbitration. However, the trial court denied these motions, too.
How does this course of conduct impact the implied waiver argument
regarding the Keys’ individual claims?10 In simple terms, it clinched the argument.
9
As noted by Smith’s counsel in their reply brief, “The Court’s exercise of
jurisdiction and consideration of this appeal is significant because of the Order
Directing Defendants to Pay Costs of Class Notice currently in the trial court below.”
10
While we are only deciding the issue of implied waiver as to the Keys’
individual claims, it is impossible to avoid discussing the class situation. The driving
21
Smith had clearly adopted a judicial forum strategy until they lost the appeal of the
class certification. At that point, what had been a judicial forum strategy that had been
clearly articulated to the court, reversed course, and became an arbitration strategy not
only as to the Keys’ individual claims but also as to the class claims. In fact, the cost
issue, as it relates to reducing the class size based on arbitration, was the driving force
as evidenced in the motions and responses presented to the trial court. It was the
cornerstone of the motion to amend the class definition. By excluding from the class
definition those class members who allegedly had arbitration provisions in their
contracts, Smith contended that the arbitration provisions could be respected and the
cost of the class notice could be substantially reduced. Alternatively, Smith contended
that the class claims should be referred to arbitration. Along with this large dispute on
the class membership and arbitration, Smith also asked to arbitrate the Keys’ claims,
which it had previously represented to the court were “no longer subject to compelled
arbitration.”
Smith’s strategy represents a classic situation of “inherent unfairness” by way of
a party attempting to “have it both ways by switching between litigation and
arbitration to its own advantage.” BBX Operating, 2018 WL 651276 at *8 (quoting Perry
Homes, 258 S.W.3d at 597). As we said in Haddock, “waiver may be found where a
force for the procedural events derived from the much bigger issues of class
arbitration and class costs. The Keys’ individual claims were just part of the milieu.
We express no opinion on implied waiver of arbitration related to the class claims.
22
party has tried and failed to achieve a satisfactory result before turning to arbitration.”
287 S.W.3d at 179. “Indeed,” we added, “failing to seek arbitration until after
proceeding in litigation to an adverse result is the clearest form of inconsistent
litigation conduct and is inevitably found to constitute substantial invocation of the
litigation process resulting in waiver.” Id. at 180; see also Hogg, 480 S.W.3d at 789–90.
Such is precisely the case here regarding the Keys’ individual claims. Smith
invoked the judicial process in its dispute with Joe Key in justice court, which is still
ongoing. Smith pursued a judicial forum strategy for over five years in this proceeding
while seeking disposition on the merits of the Keys’ claims from the trial court and
represented to the court that they had made a decision not to invoke arbitration
against the Keys’ individual claims and that such claims were beyond being judicially
compelled. Smith only attempted to invoke arbitration after it became apparent that
the judicial process was leading to an undesired result. This conduct clearly was a
significant invocation of the judicial process, and it was prejudicial to the Keys. The
trial court did not abuse its discretion in denying Smith’s Motion to Compel
Arbitration. See Perry Homes, 258 S.W.3d at 597; Hogg, 480 S.W.3d at 796; Haddock,
287 S.W.3d at 180–81; BBX Operating, 2018 WL 651276 at *8. We overrule the portion
of Smith’s issue.
2. Arbitration with Class Members (excluding the Keys)
The trial court entered a general order denying the motions and did not make
findings of fact or conclusion of law. Therefore, as the reviewing court, it is our duty
23
to affirm the trial court’s ruling if there is a sufficient basis under any legal theory
asserted in the trial court. See Amateur Athletic Union of the U.S., Inc. v. Bray, 499 S.W.3d
96, 102 (Tex. App.—San Antonio 2016, no pet.). To do so, we look to the objections
raised by the Keys in the trial court upon which the order could have been based. See
id. at 103.11
The Keys objected to the Motion to Compel Arbitration against the class
members because the issue of arbitration was not ripe as to the class members. The
Keys cited no authority specific to the question of potential-but-unasserted arbitration
claims against members of a class who have not yet been given notice of the class
action and have not yet been given the opportunity to opt out. The Keys did cite to
general principles of ripeness such as justiciability and conservation of judicial time
and resources for real and current controversies rather than abstract, hypothetical, or
remote disputes. See Perry v. Del Rio, 66 S.W.3d 239, 249 (Tex. 2001); Patterson v.
Planned Parenthood of Houston & Se. Tex., Inc., 971 S.W.2d 439, 442 (Tex. 1998); Mayhew,
964 S.W.2d at 928; TCI West End, Inc. v. City of Dallas, 274 S.W.3d 913, 918 (Tex.
App.—Dallas 2008, no pet.).
11
Although the Keys raised ripeness in the trial court, they did not raise it in
their Appellees’ Brief, despite Smith addressing it in anticipatory fashion in their
Appellants’ Brief. It is immaterial that the Keys did not address this in their Appellees’
Brief since ripeness is an element of subject matter jurisdiction and can be raised even
sua sponte by the court. It is a legal question subject to de novo review. Mayhew v.
Town of Sunnyvale, 964 S.W.2d 922, 928 (Tex. 1998).
24
The most directly relevant case cited by the Keys was Edwards v. Schuh,
5 S.W.3d 829, 831–32 (Tex. App.—Austin 1999, no pet.). Edwards had contracted
with Lasner to build three warehouses, and their construction contract had an
arbitration agreement. Schuh purchased one of the warehouses and sued Edwards for
defects in the construction. Lasner was not a party to the case, but Edwards filed a
motion to compel arbitration with Lasner. The trial court denied the motion, and the
court of appeals held that there were no justiciable claims yet between Edwards and
Lasner, so the trial court had not abused its discretion. From this case, the Keys
argued that since the class members had not yet been given notice with an
opportunity to opt out, there was no justiciable controversy for the court to decide
because whether any of them would remain as class plaintiffs or opt out made the
issue hypothetical.
We have found no Texas cases which address this situation. We decided Smith
1 under Texas Rules of Civil Procedure 42(b)(3), which was based on Rule 23, Federal
Rules of Civil Procedure. Cases interpreting Rule 23 are persuasive authority. McAllen
Med. Ctr., Inc. v. Cortez, 66 S.W.3d 227, 232 n.1 (Tex. 2001). We, therefore, can look to
the federal case law for guidance. In De Leon-Granados v. Eller & Sons Trees, Inc., the
court noted that “in a Rule 23(b)(3) class action, all qualifying class members become
party-plaintiffs unless they opt out of the action.” 497 F.3d 1214, 1219 (11th Cir.
2007). Further, in N. Sound Capital LLC v. Merck & Co., Inc., the court held that “[f]or
class actions seeking predominantly damages, Rule 23 adds that putative class
25
members do not become party plaintiffs until the time to opt out has elapsed.”
938 F.3d 482, 492–93 (3d Cir. 2019). Based on these principles, class members
become party-plaintiffs only after the class has been certified and only if they do not
opt out before the “opt-out” period passes.
Two other facets of class-action law are consistent with this conclusion. First,
the United States Supreme Court, in its landmark decision regarding tolling of
limitations on individual claims pending class certification, stated,
During the pendency of the District Court’s determination [whether to
approve the class action status], which is to be made [“]as soon as
practicable after the commencement of an action,[”] potential class
members are mere passive beneficiaries of the action brought in their
behalf. Not until the existence and limits of the class have been
established and notice of membership has been sent does a class
member have any duty to take note of the suit or to exercise any
responsibility with respect to it in order to profit from the eventual
outcome of the case.
Am. Pipe & Const. Co. v. Utah, 414 U.S. 538, 552, 94 S. Ct. 756, 765 (1974). Texas class
action law is also consistent with this concept. Before certification, suits brought as
class actions are governed by rules of procedure applicable to lawsuits generally rather
than those specific to class actions. Am. Online, Inc. v. Williams, 958 S.W.2d 268,
273 (Tex. App.—Houston [14th Dist.] 1997, no writ). Before a suit is certified as a
class action by the court, the case is treated as if it were brought by the named
plaintiffs suing on their own behalf. Id. Consequently, potential class members do not
have an interest in the litigation unless and until the class is certified. See Am. Express
Travel Related Servs. Co., Inc. v. Walton, 883 S.W.2d 703, 707 (Tex. App.—Dallas 1994,
26
no writ) (where the trial judge, who was an American Express cardholder, was held
not to be disqualified from ruling on class certification since the judge did not have an
interest in the litigation until the class was certified).
Second, the attorney client relationship does not arise in an “opt out” class
action until the class has been certified, notice to class members has been given, and
the “opt out” period has passed. We have not been cited to any Texas cases which
specifically address this point, nor have we found any. However, one Texas case
addresses part of this equation. In Gillespie v. Scherr, the court was faced with a class
action that had never been certified, and several potential class plaintiffs had sued the
named plaintiffs’ lawyers for legal malpractice for not having included them in the
named plaintiffs’ settlements. 987 S.W.2d 129, 132 (Tex. App.—Houston [14th Dist.]
1998, pet. denied). In affirming the trial court’s summary judgment in favor of the
lawyer defendants, the court held,
Moreover, a class action may be maintained as such only by order of the
trial court. See TEX. R. CIV. P. 42(c)(1). Until a trial court determines
that all prerequisites to certification are satisfied, there is no class action,
the case proceeds as an ordinary lawsuit, and attorneys for named class
members have no authority to represent or otherwise act on behalf of
the unnamed class members. Under these circumstances, we decline to
hold that named plaintiffs’ attorneys owe a precertification duty to
unnamed class members. We therefore overrule appellants’ first point
of error and need not address appellants’ second and third points of
error concerning breach of duty and existence of damage.
Id. (emphasis added)
27
Since the Gillespie court was dealing with an alleged but uncertified class, not a
class action certified as an “opt-out” class, it dealt only with pre-certification duties.
To address the situation where a class action is pending, we find support in The Kay
Co., L.L.C. v. Equitable Prod. Co., 246 F.R.D. 260, 264 (S.D. W. Va. 2007). There, the
named plaintiffs’ attorneys sought an order prohibiting defense counsel from
communicating with putative class members. For guidance, the court looked to the
ABA Commission on Ethics and Professional Responsibility: “A client-lawyer
relationship with a potential member of the class does not begin until the class has
been certified and the time for opting out by a potential member of the class has
expired.” Id. (citing ABA Comm. on Ethics and Pro. Resp., Formal Op. 07–
445 (2007)). The court went on to hold that communications between defense
counsel and putative class members did not violate West Virginia ethical rules in
denying the protective order. Id. see also Walney v. Swepi LP, No. CV 13-102 ERIE,
2017 WL 319801, at *13 (W.D. Pa. Jan. 23, 2017) (“The majority rule is that . . .
absent class members are not represented parties prior to class certification and the
expiration of any opt-out period.”).
Applying the rationale of these authorities, we hold that the class members
under the trial court’s certification order in this case were not party plaintiffs at the
time of the hearing on Smith’s Motion to Compel Arbitration. They had no obligation
to do anything regarding the case since they had not been given notice and because
the “opt out” period had not expired. Smith had not asserted claims against them, and
28
they had not asserted claims against Smith. Whether any of them would opt out of the
class after receiving class notification was pure speculation. Thus, we hold that there
was no justiciable controversy between Smith and the class members at the time the
trial court denied Smith’s Motion to Compel Arbitration. There being no justiciable
controversy, the court had no jurisdiction to order arbitration with the class members,
so it follows there was no abuse of discretion in denying the Motion to Compel
arbitration. We overrule this remaining portion of Smith’s issue.
IV. Conclusion
Having held that we have no jurisdiction to hear Smith’s interlocutory appeal of
the trial court’s order denying their Motion to Amend Class Certification, we dismiss
that portion of the appeal for want of jurisdiction.
Having held that Smith expressly waived their right to arbitrate the Keys’
individual claims or, in the alternative, impliedly waived their rights to do so by virtue
of their litigation conduct, we affirm the portion of the trial court’s order denying
their Motion to Compel Arbitration as to the Keys’ individual claims.
Having held that the trial court did not abuse its discretion in denying Smith’s
Motion to Compel Arbitration with the class members, we affirm the portion of the
trial court’s order denying their Motion to Compel Arbitration as to the class
members.
We order the case remanded to the trial court for further proceedings not
inconsistent with this opinion.
29
/s/ Mike Wallach
Mike Wallach
Justice
Delivered: April 14, 2022
30